Welltower Inc. (WELL) Earnings Call Transcript & Summary

Welcome to the 11:15 a.m. session at Citi's 2022 Global Property CEO Conference. I'm Nick Joseph. I'm here with Michael Bilerman, and we're here with Citi Research, and we're pleased to have with us Welltower CEO, Shankh Mitra. This session is for city clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AB desk. [Operator Instructions] Shankh, will turn it over to you to introduce the company and the management team, and then we'll get into Q&A.

Thank you, Nick. Thanks for inviting us here. We are a health care and wellness infrastructure company, Welltower is. We work and we have presence in 3 countries: U.S., U.K., Canada, and offices across different parts of these 3 countries. With me, we have Tim McHugh, our CFO; and John Burkart, our COO. And we're happy to be here and answer any questions.

You said you're a wellness, health care and infrastructure or wellness infrastructure?

I said wellness and health care infrastructure.

And health care infrastructure. And how would you define the total addressable market for how you define health care infrastructure?

It depends on where you -- it's different for different businesses we're in. Obviously, if you're looking at, say, senior housing, I'll just give you one example. That in U.S., total addressable market is, call it, give or take, low to mid-20 million people. And on the other hand, if you look at our wellness housing business, which is empty nesters plus to sort of, call it, active adult and all the things we do, that total addressable market is about 115 million people in this country. On the other hand, if you look at our medical office business where you have been seeing a rapid of sort of different services come out of hospitals into the outpatient space, your total addressable market is likely around 200 million square feet.

Do you envision yourself going deeper into the ecosystem of health care, above and beyond the product type in terms of just owning and renting and managing the managers? With ambitions, I guess -- when I hear health care infrastructure, I don't hear I'm a senior housing, medical office-focused company. I hear something that is a grander of ambitions, but maybe I'm reading it wrong.

Maybe you're reading it wrong. My grand ambition is very simple. I want to make...

Make money.

Make money on a per-share basis. That's the only ambition we have. We want to have the highest return for our owners and do it in a long-term sustainable basis. I have no grand ambition to take over the wall, but -- and I never have. I can guarantee that -- very few things you can guarantee. That's one of them. we allocate capital to make money on a per-share basis. But I'll tell you, we're very happy with the sort of the areas we play. We think there's a terrific opportunity to go deep. Sometimes we see dislocations that will -- might change our view and to go broad. But I like to go deep rather than go broad. And that sort of gives you a sense of how you can change your incremental return on capital, not just financial capital, but also human capital.

Shankh, we started each of these sessions asking each CEO, why they should buy -- why an investor should buy your stock over any other listed property company, not health care peers, but why should Welltower be at the front of the class?

Yes. So let's just think about where we are. Very few times in life cycle of an asset class or an industry, you get an opportunity to buy something at cyclical and secular lows. Rarely, those 2 things come together. So you get basically a Lollapalooza Effect of a cyclical superimposed with secular, right? That's where we are from a majority of our assets, majority of the cash flow. So that's a very important point. So you're going to get very significant cash flow growth for years to come. Second, you know that we are very proud of the fact that we are very, very good allocators of capital. We have been very careful about how we allocate our owners' capital to create partial value and our track record speaks for itself. And the third is we have built a world-class predictive analytics platform that is unmatched and you will not find anything like it in any real estate company around the world, right? So that helps us to allocate capital so far, and John is taking that to operationalize that whole data platform to increase sort of the art of the possible of what this industry can become where the margins can go.

On that last point on the data analytics front, where are you in terms of just size of organization, investment spend? And how should investors think about how you benefit from that? And I know it informed a lot of your acquisition decisions, but maybe just peel back the onion a little bit about the size of the platform overall.

I'm not going to get into cost. Let's just say that's very, very significant. I'm not going to get into how many people we have, but I can tell you today, we hire more stats PhDs than MBAs. So -- but I will answer the last question, which is how investors benefit. We do not sell data. We buy data from about 239 different sources, and we have a very proprietary, obviously, performance data that goes across 15 years of time series and 40-plus in U.S. So total 60 operators in 3 countries we do business. You cannot buy that data, you can't have that insight because you can't buy it. So we don't sell our data. We don't sell our insight. What we do, we obviously do a business with an ecosystem of external partner. We price that insight into how those deals get recapitalized. In other words, Michael, if you're a partner of mine, you can tell me, I have to pay you market if we do a deal together because you are getting something from me that you can't get from someone else, which is that insight, which is if you give me a latitude and longitude, I can tell you for a given asset class we play in, what is the right product mix, what will be the size? Who will be the best operator that will maximize the NOI, what will be the unit mix of that product, what should be total size. These are the things we can tell you that no one else can tell you. So there's a value of that and that gets priced in into the transaction economics.

When COVID hit, I think companies had 2 different decisions, right? You either focused internally and kept everything or you sort of stepped on the gas and looked at opportunities. And you guys fell into that camp of being pretty aggressive on the acquisition front. How much of that was driven just by the data that you were collecting versus other -- versus just looking at the risk-adjusted values and saying, we should just go for it?

Yes, extraordinarily good question. So what we noticed, you would recall, we went into this, we're a net seller of senior housing going into COVID. What was that driven by? Did we know there was going to be a pandemic? No, we didn't. We saw prices that told us that it's a pretty good time to sell. So we sold, right? We're price driven. We had a great balance sheet going into this. We had a huge amount of money raised in the ATM. COVID hit, we realized pretty soon, how things changed. We sold assets when the pricing was there, pre-COVID pricing was there very early March, April, right, and shored up our balance sheet, which was already in a great place. We shored up farther. And as we are going to the first wave of COVID and the second wave of COVID, we realized -- we noticed that every single week when COVID in a place came down, where people could move in, they moved in, which made us realize the fact that demand is there. It is going to come back. That insight pushed us from playing the defense to offense, right? And we saw massive blood on the street. Obviously, you saw capital after capital exited and we're on the other side of a majority of these things. And frankly speaking, it was just more than capital. It meant a lot for the industry that we were there. In the worst time of this business, we're there shoulder-to-shoulder with our partners and supported the industry, supported our operating partners, employees, residents, and that meant a lot to the business. From our perspective, the risk-adjusted return was there because the price was there, right? It was just as simple a question of price. So we went through this aggressively to do, frankly speaking, from a capital allocation standpoint, you saw we probably deployed in the last 18 months, $7 billion or so of capital. But that dollar value doesn't tell you what in a normal environment that could have been, at least would have been double for the same number of units. So one way to look at it not just a dollar volume, but look at how many units we bought. And interestingly, we bought majority of this thing newer product, right? Because you had a supply cycle before COVID, a lot of people had LIBOR-based loans. Loans have come to you. So we helped a lot of people to recapitalize and buy it at a good basis for investors, which we think will create tremendous amount of cash flow and -- returns and cash flow growth for years to come.

Shankh, you took over as CEO, it was October 2020 after a number of years with the firm in various increasing capacities. How are you managing the enterprise different than Tom, who you were partners with for a number of years? And how do you think the organization has changed under your leadership?

Look, Tom, Tim and I ran this company together. Tom was a very collaborative leader, and we said pretty much everything together as a strategy. Tom had a grander vision of health care. I have a more narrow vision of making money for the investors, what is not add odds, but frankly speaking...

So you're not going to Davos next year?

No, I don't. And I will tell you it's not one is right versus wrong. It's just very simply my focus, I'm a capital allocator. I'm sort of inspired by different things. And that's sort of what we have done. The change is also we brought an enormous amount of talent in last 18 months that may have coincided with me taking over, but has nothing to do with it. It was just -- so many people we have let go so much talent in 2020. I'm a countercyclical investor, right? And I saw that and I just went in, doubled down and hired lots of people, right? Because they're available. That is nothing to do with I was the CEO or not the CEO, even if Tom was the CEO, would have done the exact same thing. So fundamentally, I'm a countercyclical investor. We invest in assets, we invest in people. We invested, obviously, a lot of operators and developers and partners. We were there because we saw an opportunity that was a huge, huge air pocket, and we're the only people who were there. I think, Michael, I mentioned this to you that when the entire world shutdown, we didn't stop, we're on road every single week going back to April of 2020. We have been doing this transaction, sitting in people's backyard. I was doing this transaction sitting in people's backyard. That could have been wrong, but I just saw the risk-adjusted return, so we did it. Hopefully, that turns out to be right. We're in the business of probabilities, not in the business of possibilities. Anything can happen. It's just you have to think about what are the probabilities of things happening and what the risk-adjusted outcome of those events, right? And that's how you allocate capital.

A recreational mathematician, I hear, just on the side.

Yes.

And LEGO builder.

Mathematics is a thing that I just -- it just stayed near and dear to my heart. And if you work with me, somebody like Tim, you get a Saturday night text and say, "I can't solve this problem, can you help me?" which happens to me. And I can't solve the problems many times. And we work together. That sort of gives you a sense of how we work. We're like a sports team, right? We're constantly 24/7 at this, want to win, want to win big, right, but over a longer period of time.

John, as a new hire and a person that has come over from a different asset class, how would you describe your -- it's been -- so we're talking almost a year and 3 months, 15 months now -- about?

Started in July.

Right. So how have you found it in terms of the intensity of organization and sort of your ability to affect operations?

It's fantastic. The team that Shankh has built is amazing. It's -- at this point, it's family, it's home. -- truly love it. We connect very, very well. So that part,, jumping into the culture was very easy. It is very fast pace. But it's fast pace that comes from an intense passion. I work closely with the data analytics team and we will communicate on Sundays not because of the need because something has to get delivered on Monday, but because the excitement because someone identifies something over the weekend and they'll send a note around, and we all just start talking because it's an extreme excitement. We see the opportunity in this space is being disruptive, not incremental and the team is very focused on that and truly from the heart of hearts are loving it, enjoying it and running hard. So I love it. It's been very easy to step in and feel like it's kind of plug and play.

And what's the receptivity from the operators? I know you've spent -- I mean you've slept at senior housing facilities. And so if that's not due diligence, I don't know what is. And you've tried to live and breathe these facilities. How have the operators taking your feedback in terms of things you're trying to change?

Well, to start with, I'll usually start the conversation with them in a way, like talk to me like I'm a 5-year old because I'm pretty ignorant on the business. So I start from that position literally, I'll say that, and listen to where they're at. Most of them actually have a very fascinating story. It typically relates to a family member as to why they're even in the business. And so when you look at what's going on, they do a phenomenal job of that one differentiating piece of the residential portion, which is the care. And that's where the focus is. That's where their passion started. So I'll listen to that and I respect that, and I see that and then engage in the other aspects of the business, which are really not there for day. And so I don't push too hard. I don't actually need to. I'll use the point out different things, show them various items. And if I get pushed back, I move to the next operator. What's been fascinating is they have this realization that there is, at this point in time, a substantial amount of competition. And so -- for example, one of operators I was working with and the CEO was very interested in what I was going to work with them on, their team less so, a little bit of passive aggressive. So I left, I just left the office and the CEO says, what are you doing? And I said, "Well, I'm done. It's not worth my time. There's other operators, I'm going to work with them." That had a pretty big impact. They changed the game pretty rapidly. So the bottom line is people are people and change is something that people are averse to, but I have found the operators to be wonderful to work with. They're excited about the future. There will be some laggards and there are some leaders, but they're very excited about it. And the more I get in and move from talking about conceptual stuff and get to real practical items they're seeing it. It's facts and they're embracing it. So I think the changes come in, and I think the speed of change is going to increase over and over and over again. I think it will be exponential in the coming years.

How are you thinking about the opportunity ahead of you versus kind of your career in apartments and the operational efficiencies that were driven there?

You said what are the differences there?

No, I guess it's more on kind of the opportunity, right? So you're with apartments for a very long time, right? You saw a modernization of the apartment industry. Where are we today on senior housing relative to your career within apartment?

Okay. Great question. Shankh, when I originally spoke with him, he said, it's kind of like 20 years behind the apartment. And I think I mentioned to him shortly after I started, I think it's more like 1970. It's more like the for sale sign that sits out in front. And to put some concept, one of the things I did as I tested to see what's the responsiveness to customer inquiries. Well, if you go back to the '70s, the little sign was out there and it was said, "Don't bother me, I'll show the unit at 1:00 on Sunday and you all come in." And well, in one case, 6 out of 6 inquiries, no response, zero, nada, nothing. Nothing. It's crickets. And others, on average, maybe 50% of the inquiries got 0. Just to put context around it, it really is multifamily of kind of the '70s. Again, these are businesses that got started. Their focus is on care. They're not focused on the other aspects of the business, and they're just moving along. And so what they do with care, the care is great. When you talk about the other aspects of the business, the marketing, the value proposition, the asset management and these things, the opportunity is huge, truly huge, shocking. That's why I say it's disruptive. It will fundamentally change the business and how people interact with.

And from a contractual standpoint, how do you think about implementing that? Because it's very different than apartments, right? You go up to one of your apartment buildings and you tell them exactly what to do, where it's here. So it's a different operator.

Yes, I'll answer it, but Shankh may or Tim may want to finish up. But the reality is what has happened and what Welltower has done and really doubled down on through COVID, fundamentally changed the contracts. We are the owners. They are managers. We have control, and they know that. And I don't push that piece around in an aggressive way. But at the end of the day, if we want to take properties away, we will. Really no different than fee management, multifamily. It's a fundamentally different contract than what people are used to from the past, where they had much, much more control.

Yes, I've said several times, if John started, when Shankh and I came in, I think he would have gotten bored and left after 3 months. And -- because we didn't have the same contracts in place. So we've changed a lot of the -- and the best way to put it in alignment. We just got very good alignment now with the operators, where, of course, they're operating day-to-day and managing the day-to-day. But our ability to have kind of centralized data and insights and push those out and have responsiveness to it and have some contractual teeth to why there will be responsiveness has changed meaningfully, and it really made for the time John's arrival, to be pretty perfect in that regard.

What percentage of those contracts have moved to RIDEA 3.0 versus they're still legacy?

All of them.

So you have the opportunity across the board basically...

I might be missing 1 or 2 in my head, but all of them.

And when you think about kind of the stick, I guess, right, so if the carrot doesn't work, if you do transition, how much of a challenge is that? And what percentage of the operators have been receptive versus may need a little more of a push?

I think, look, we have changed a lot of buildings. You have known probably a couple of hundred buildings. A lot of you know me well to note that I'll actually do it. I don't talk about it. I've done a lot. I will do it. And as you do it, you learn how to do it, right? You might not have noticed but we moved a significant number of properties last year in U.K. without massive disruption. It had some disruption, which will obviously be -- we're on the other side of this, which you will see the benefit of that in 2022 and 2023 cash flow. But 4 years ago, when I did this first time, we got very significant disruption. Now we've learned how to do this much better. And John now, obviously, is the one who is driving this. So we got into a much better place by doing it and making mistakes and learning from those mistakes. So it was just at the end of the day, we want to be fair, right? Just sort of the conversation is not about leverage or power. It's just a conversation of these buildings are owned by our shareholders, right? And we want to do what's right for them. I mean it's just not -- you need to be fair to people to make sure that people you do business with, they understand who you are, you're transparent or consistent. You don't change your message every day depending on the flavor of the day. And we want to do the right thing by the people. But they understand where we come from. We're in extreme fiduciaries and everybody in the business knows that. And there's nothing wrong with it. And alignment of interest is a very, very big thing for us. Our point is not, we want to win at the expense of you. Our simple point is wanting to sink or swim together. And that's pretty fair. And most people are good people. They want to be treated with fairness. And if the positions were reversed, they would do exactly the same.

As you think about the data analytics platform and all the data and the insights that are gained from it, how far along are you -- how far along is the implementation in terms of the results or the output coming through the actual numbers and performance?

Yes. I mean again, we're building on top of the amazing platform that already exists, right? So Shankh talked about the platform that exists. So the next step as far as operationalizing that, we're at the beginning stages. This is just the very beginning stages of how we operationalize that and then use that to drive results and then ultimately rolling through the financials. Great question. At the end of the day, it's dollars per share. How is it showing up in the bottom line? We're at the very beginning. It's literally at our office, our glass wall and it's -- the platform is written on the wall. And we're -- first meeting is in about 1.5 weeks, 2 weeks to start implementing part of data hub in the cloud and so -- on that component of it. So it's just at the beginning stages, and there's different pieces. We're kind of parallel processing the pieces. So it's not in a series. It won't take years and years to deliver. It will be a little bit -- you might even call it, in my word, I'm simple, sloppy because there'll be a bunch of different pieces floating around because otherwise, it just takes too long to deliver the final results. So we'll -- one of the benefits of having multiple operators is we can avoid the tiring impact of too many initiatives at one time in one place, which is a challenge if you only have 1 or 2 companies. Having multiple operators, we can try different things at different operators, parallel path and then ultimately bring it all together. So that's kind of the strategy.

And how are you thinking about the impact on staffing? I guess, both near term, what are the trends you're seeing, particularly from temp staffing? And then what's the opportunity to become more efficient going forward on the senior living side?

Yes. So staffing, as we said, we've been net hiring for some time. There was a disruption because Omicron PTO, I won't go into in this forum. I talked about it on the earnings call. But my expectation is that the staffing continues to improve over time. I think what the agencies did in the sense of, in some cases, 6x charges for that peak in December, early January was greatly to their detriment. It certainly motivated people to look longer term to really reduce that. So it's just not even a part of the picture going forward. We'll see how that works. As it relates to the opportunities to reduce staff or really increase efficiencies, I think they're pretty substantial. I mean, again, you look at each aspect of this business and how technology can help -- to give one silly quick example, just how food orders are taken and delivered to the kitchen is all the manual process right now. So a lot of the meals are eaten in the room. It's all manual, literally people carrying notes down to the kitchen and saying, Shankh would like a cheeseburger. I mean you look and you go, this should just be punched into an iPad and done, delivered to the kitchen, the food gets delivered. So there's opportunities throughout the whole process to upgrade. But again, it gets to this historic setting that I'd say the industry is in, 1970s.

Shankh, where -- you guys put out a business update, I guess, yesterday morning. Part of that was kind of another senior housing acquisition, another $550 million. Where are you seeing, and maybe it is senior housing, the best risk-adjusted returns today as you look at the acquisition market?

Yes. We are still buying significantly below replacement costs. That's obviously every day. These transactions. If you could pull it off is getting bigger, better because cost is going straight up, right, across, as you know. That's where the best risk-adjusted returns are as long as we could buy below replacement costs, and we're still buying significantly below replacement costs. That's where we're going to allocate money.

A couple of questions that came through from the audience. The first one is, there have been a number of home health companies that have IPO-ed recently. With the addition of technology, this is becoming a more viable option than it has been in the past. This is a risk because most adults would rather age in place than in assisted living facility.

Yes. I'll start on that. I think there's a bit of a misunderstanding as far as home health and how it interplays with most of what we own. Home health has been very disruptive to skilled nursing as a reimbursable business, government. And I think we've seen that both on the way the government has interfaced with skilled nursing and also the way that it has promoted home health. But when you think about what the competition for senior housing is: private pay, home aid, home nursing. So different product type. And I think there certainly is -- we've seen that technology has elongated the period at which you can stay at home. But when you think about higher acuity senior living, you're talking about the last couple of years of life, you're still talking about very high-touch care. And if anything, the labor market right now and the discussion around it and a lot of what we've known has coming for a while, which is the impact of demographics on just the caregiver to seniors ratio, I think, is going to make a case for scaled care or facility-based care, residential care even stronger than kind of on a one-to-one basis. So it certainly is interesting, and technology is going to play a big role in how we continue to make our own homes more efficient. And I think that's how we think about our buildings is the home for the resident. But I think home health as a Medicare reimbursed business is not the right parallel for seniors housing.

Tim, another person came here about -- just to provide an update on ProMedica. The investor wrote $275 million loss reported for 2021...

What's the last part of it?

Just it says update on ProMedica? $275 million loss reported for 2021...

I don't even know what that means. ProMedica, if you are very interested in that topic, you should go back to the transcript when we did the transaction. We described obviously that it has a mothership guarantee. I understand it's hard to -- for investors and analysts to understand that because there is no such lease in the entire commercial [indiscernible] like that. So it is not sitting in an SPV. It is actually guaranteed by ProMedica Health System, which is, what, $7 billion of revenue and significantly more than their asset and that entire asset base and the revenue stream backs the lease, right? So underlying assets are not responsible for paying the rent, the mothership is. So there's not much to talk about. I said that on the call several times on this topic.

Well, I guess -- and there's no doubt that you have the credit given that lease that was structured and the waterfalls there, but the business is tough, right? I mean it's not a relative certainly to what you're just talking about in senior housing, right? It's a much more difficult business right now? And what is the ultimate exit?

I don't -- first is you know that there's a lot of senior -- private pay senior living as a part of that, right? I hope you know that. We are very comfortable for what we think is going to happen. So the business, obviously, what's happening is the agency cost has been a very big drag to the senior side of the business. Their hospitals have done extraordinarily well. So look, I don't know the reported numbers, but I obviously know their operating numbers. I'm on the board of that company. So look, we have 3 types of businesses. Some does well on some years, some others don't. They've been in the same year, the senior business hasn't done well, they own a [indiscernible] which did extraordinarily well, right? So it's a diversified business model. I'm very comfortable with my 15 years of cash flow and rent payment from that company. We'll figure out what happens after that. But I will remind you something, fundamentals of real estate, its basis and staying power. We bought that portfolio at $57,000 per unit, and our partner owns 20% of it, which is subordinated to our position. Our net basis in that deal is $44,000 per bed. If we can't make money on $44,000 per bed, there will not be an industry.

Shankh, I'm going to take 2 questions together. What do you think is the biggest growth opportunity that Welltower has that you don't think the market is giving you credit for? And then thinking about where you currently trade, why do you think you trade at such a large premia relative to your closest competitor? Is it more that they're trading at a discount for their own company reasons? Or do you feel like you are there at the right valuation, and you're getting a deserved premia for all the things you talked about at the beginning in terms of data analytics, the growth, management team and all those factors?

Look, I don't focus on other companies, that my goal has never been...

That was your old job when you used to focus on all the other companies.

That's not what I do, right. So I'm focused on how I can allocate capital to make money on a per-share basis. So my job -- I've said it multiple times that I have no interest in elephant hunting, I have no interest in all this public company drama. We do, at a very simple basis, is focus on how can we make money on a per-share basis in a situation where we can solve people's problems. That's just what we do. It's much more -- the private market is so much more inefficient. People have lots of consideration other than price, estate planning, life issues. You don't want to be in the business. We bring in operators, all sorts of things. That's what we're focused on. So I will tell you, I'll probably partially answer your question that you can look at how we have allocated capital on every asset classes, we -- there's nothing we own is not for sale. So we have sold, the 3, 4 asset classes were involved. We have sold well, and we have bought well, right? It's just very simple capital allocation strategy that we're here to make money for our owners on a per-share basis. It is not more complicated than that, right? So we usually tend to buy closer to sort of when the price is cheap and we're not infatuated with the assets and we sell when the price is not cheap. It's simple.

All right. We're going to get through 4 questions in 50 seconds. What's your #1 ESG priority in 2022?

Yes. We don't necessarily -- about #1 goal, I mean we don't have a checklist of things to kind of get through, but last year, we introduced ESG goals into our executive compensation and it's pretty robust around E, S and G about improving rankings with certain constituents, is about increasing diversity inclusion. And we are increasing kind of the threshold on those in 2022. There'll be more in our proxy in a few weeks when it comes out in that.

Same-store NOI growth for the senior housing industry overall next year in '23.

It will be significant and it will surprise you.

You want to put a number on it?

No.

10-year treasury yield a year from now.

Tell me what's your view on Ukraine and COVID, I'll give you the answer.

Well, you're allocating capital. So you have to have a view of what your cost of debt is.

Not necessarily. If you look at how we manage our balance sheet, but if you don't have this kind of significant exogenous event that we're talking about, it's likely to be higher. All things being equal, rates are going higher.

So you want to say 2.50% just so we have a number in the spreadsheet.

Fine. 2.50% is fine.

Will the health care sector have more or fewer companies a year from now?

No idea.

Which one, more or fewer? Do you think they will have -- I know you said you won't elephant hunt on M&A, but do you think there'll be private capital that steps up and takes on [ REIT ]?

I don't personally think that health care M&A. I guess we have one 1 M&A.

You've 1 right now.

So by definition, there should be less, right?

All right. Great. Well, thank you very much.